Related and Interested Parties

By Cindy McGiffin, Senior

8601 Robert Fulton Drive l Suite 210 l Columbia, MD 21046 l 410-423-4800 l Fax 410-381-5538 l www.uhy-us.com
UHY LLP pr ovi des sol ut i ons t o nonpr of i t f i r ms
i n account i ng, t ax and consul t i ng.
FASB Excludes All
Nonprofits from
Public Business
Entity Definition
By Suesan Patton,
Director of Quality Initiative
T
he Financial
Accounting
S t a n d a r d s
Board (FASB)
agreed in De-
cember 2013,
that a public
business en-
tity is an en-
tity that meets any one of the six
criteria delineated in its Account-
ing Standards Update (ASU) 2013-
12, Definition of a Public Business
Entity. Although not-for-profits
may sometimes meet one of these
six criteria, the ASU specifically
states that, Neither a not-for-
profit entity nor an employee ben-
efit plan is a business entity.
Not-for-profits are defined, and
their accounting requirements are
addressed, in FASB ASC Section
958, Not-for-Profit Entities.
This definition of public business
entity will be used by three organ-
izationsthe FASB itself, its Emerg-
continued on page 2
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For more information,
please contact Jennine Anderson
at janderson@uhy-us.com
Nonprofit
Insider
June 2014 Vol. 5 No. 3
sidiary) or common control under
and with another entity (brother/sis-
ter). For this purpose, control means
having the power to remove and re-
place a majority of another organi-
zations directors or a majority of the
members who elect the directors.
Control in either direction creates re-
lated parties. To understand better
this issue of control, the questions to
ask are these
Are a majority of your NFPs direc-
tors being elected by the potentially
related organization?
Are a majority of your NFPs direc-
tors comprised of individuals con-
nected to the potentially related
organization as its directors, officers,
employees or agents?
Control in either direction creates re-
lated parties; for example, another
entity electing a majority of your
NFPs directors or your NFP electing a
majority of another entitys directors.
Control can also be direct or indirect.
For example: NFP #1 appoints the
board of NFP #2. NFP #2 appoints the
board of NFP #3. NFPs #1 and #2 are
related parties (directly); #2 and #3
are related parties (directly); and #1
and #3 are related parties (indirectly).
W
hen prepar-
ing a Form
990, one of the
first steps to take
should be identi-
fying what are
called related or-
ganizations and
interested par-
ties. These relationships come into
play on various parts and schedules of
the 990, so its helpful to identify them
early in the process.
Related Organizations
By definition, a related organization
is any entity that has one of the fol-
lowing relationships with your not-for
profit (NFP) organization: parent, sub-
sidiary, brother/sister, supporting
[509(a)(3)], supported [509(a)(1) or
509(a)(2)], and a few associations re-
lated to voluntary employee benefici-
ary association plans, or VEBAs.
These related organizations could be
not-for-profits, corporations, part-
nerships, trusts or government units.
In determining when your NFP is in a
parent, subsidiary, or brother/sister
relationship with another entity, the
key is control: control by your NFP
(parent), control of your NFP (sub-
UHY LLP
Mid-Atlantic
continued on page 2
Our firm provides the information in this newsletter as tax information and general business or economic information or analysis for educational purposes, and none of the information contained herein is intended to serve as a so-
licitation of any service or product. This information does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should
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with all pertinent facts relevant to your particular situation. Tax articles in this newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed
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UHY Advisors, Inc. provides tax and business consulting services through wholly owned subsidiary entities that operate under the name of UHY Advisors. UHY Advisors, Inc. and its subsidiary entities are not licensed CPA firms.
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When related parties exist, they are
reported on the 990s supplemental
Schedule R. In addition to naming the
related parties, certain transactions
with related parties must be disclosed.
These are detailed in the instructions
to Schedule R.
Interested Parties
The definition of interested party
varies with each section of the 990s
supplemental Schedule L. It can
mean
Trustees, directors, officers, key em-
ployees (TDOKE) and family mem-
bers thereof;
Substantial contributors (which is a
term unique to Schedule L) and
family members thereof; a substan-
tial contributor is anyone who made
a contribution of $5,000 or more
and is required to be reported on
Schedule B;
Grant selection committee members
and family members thereof; and/or
An entity of which any of the above
parties owned or controlled 35 per-
cent or more (where the meaning of
control is the same as described in
Related Organizations above).
Schedule L of the 990 reports various
types of transactions with interested
parties, including excess benefit
transactions, loans, grants or other
assistance, and other business trans-
actions. There are various reporting
thresholds and exceptions, depend-
ing on the type of interested party
and the type of transaction. These are
detailed in the instructions to Sched-
ule L. Its important to note that
Schedule L reportable transactions
can impact the independence of
board members (Question 1b on Part
VI of the 990).
Here are some examples of transac-
tions that may be reportable on
Schedule L, if specific reporting thres-
holds are met
A family member of a director is an
employee of the NFP;
The spouse or child of a current or
former director or officer is a part-
ner in a law firm to whom the NFP
makes payments for services; and/or
The NFP utilizes a management
company to whom they pay a man-
agement fee; and the owner of the
management company serves as ex-
ecutive director of the NFP.
Identifying Related
and Interested Parties
The IRS requires reasonable effort
of your organization to gather in-
formation required on related and
interested parties. An annual ques-
tionnaire distributed to each TDOKE
that addresses the issues of relation-
ships and transactions would be con-
sidered reasonable effort.
The instructions for both Schedule L
and Schedule R provide all the details
needed to identify and determine
your NFPs related and interested par-
ties. The tax professionals at UHY are
also a resource to help you through
this complex information.
ing Issues Task Force, and the re-
cently formed Private Company
Council (PCC)to specify the
scope and effect of future ac-
counting pronouncements. In par-
ticular, the definition will be used
to delineate all entities that are
outside the scope of the PCCs
publication, Private Company De-
cision-Making Framework: A
Guide for Evaluating Financial Ac-
counting and Reporting for Pri-
vate Companies. The PCC has been
charged with developing account-
ing alternatives within U.S. GAAP
that would be appropriate to pri-
vate companies. FASB approval of
these alternatives is required.
In its Basis for Conclusions sec-
tion of ASU 2013-12, the FASB
notes that it considered distin-
guishing between NFPs on the ba-
sis of (a) whether the NFP issues or
is an obligor for conduit debt se-
curities that are traded in a public
market, (b) whether it receives
public donations, or (c) some size
threshold. The board decided that
these criteria may not be appro-
priate in all circumstances and
may create an ineffective bright
line among NFPs.
Instead, the FASB agreed that it
will consider on a standard-by-
standard basis, whether all, none,
or only some NFPs should be per-
mitted to apply accounting and re-
porting alternatives in U.S. GAAP
intended to limit the cost of com-
pliance for certain entities. The
FASB will base its decisions on NFP
entity user needs and resources.
FASB Excludes All
Nonprots from Public
Business Entity Denition
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Related and Interested Parties
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